ECB Steps Up `Fight,' Offers Banks Unlimited Cash

By Christian Vits

Oct. 9 (Bloomberg) -- The European Central Bank brought forward plans to lend banks unlimited cash and pumped a record $100 billion in overnight funds into the financial system after an interest-rate cut failed to soothe tensions in money markets.

The Frankfurt-based ECB lent banks an additional 24.7 billion euros for six days, filling all bids at its new benchmark rate of 3.75 percent under new auction rules it had intended to introduce next week. The Frankfurt-based central bank yesterday lowered its key rate from 4.25 percent.

The U.S. Federal Reserve and the ECB led a global round of rate cuts in an effort to shore up confidence in a financial system roiled by a wave of banking collapses. The cost of borrowing in euros for three months nevertheless held at a record high today.

The ``ECB looks keen to take up the fight,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``After cutting borrowing costs, the last thing central banks want is for market rates to remain steady or, even worse, rise further.''

The rate that banks charge for three-month euro loans was unchanged at 5.39 percent, according to the British Bankers' Association. The cost of borrowing in dollars for three months jumped to the highest level since December, the BBA said.


Commercial banks are refusing to lend to each other after the U.S. housing slump caused the collapse of New York-based Lehman Brothers Holdings Inc. That's pushed market interest rates to records even as the ECB and other central banks injected billions of euros and dollars into the banking system.

Dollar Injection

The ECB today raised the amount of dollars it lends banks overnight to $100 billion from $70 billion yesterday and $50 billion the day before.

In changes to its auctions announced last night, the ECB said it will lend banks as much cash as they can provide collateral for at the benchmark rate, rather than at a higher rate determined by demand. The new rules were originally to be introduced on Oct. 15.

The ECB yesterday also narrowed the corridor around its key rate to 100 basis points from 200 points. That means it reduced the cost of emergency overnight cash to 4.25 percent from 4.75 percent and raised the rate it pays banks for overnight deposits to 3.25 percent from 2.75 percent.

The moves by the ECB come as the 15-nation euro-region teeters on the brink of a recession and banks reel from the shortage of credit. Governments in Germany, France, Belgium, and Luxembourg have been forced to step in and rescue ailing banks.

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net